Purchase Order Financing

A Variation on Factoring

invoices stamped
Purchase order financing helps businesses pay their suppliers on time. David Gould/Photographer's Choice RF/Getty Images

Purchase order financing is a funding option for resellers or distributors of hard goods that lack the funds to pay the manufacturers thereof. Moreover, the sorts of firms that utilize purchase order financing are those that are not considered sufficiently creditworthy by the manufacturers.  Otherwise, they would be allowed to pay their invoices sometime after receiving shipment (and perhaps after receiving payment from their own customers).

What Is a Purchase Order?

It represents a customer's firm commitment to buy goods from a product reseller or distributor. On the basis of such purchase orders, a purchase order financing company will pay the manufacturer to produce and ship the goods.

Once payment is collected from the reseller or distributor that submitted purchase orders from its customers, the purchase order financing company will be reimbursed for its outlays and collect its fee. Purchase order financing is a variation on factoring that has been growing significantly since the 1990s.

Purchase Order Financing Terms and Conditions:

A typical purchase order financing loan bears interest at rates in excess of 40% per annum. Rates of 3.5% for the first month and 1.25% for each 10 days thereafter are commonplace terms, and 60 days is the usual duration of such loans.

Purchase Order Financing Prevalence: 

There appears to be only a handful of independent purchase order financing companies of any size currently in operation.

Precise statistics are not available on this lending niche. The customer base of these companies consists of small businesses that are having difficulty obtaining bank loans, even from banks with which they have longstanding relationships.

Some banks do some purchase order financing, but typically only for existing clients.

Wells Fargo seems to be the only major bank with a dedicated purchase order financing unit.​